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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from _______________ to ______________
Commission file number 0-26140
MINORPLANET SYSTEMS USA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0352879
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1155 Kas Drive, Suite 100, Richardson, Texas 75081
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 301-2000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding as of
Title of each class April 11, 2003
- ---------------------------- ----------------------------------
Common Stock, $.01 par value 48,349,161
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at February 28, 2003
and August 31, 2002 3
Consolidated Statements of Operations for the three and
six months ended February 28, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six
months ended February 28, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended February 28, 2003 6
Notes to Consolidated Financial Statements 7-13
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4 Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
2
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
ASSETS
February 28, August 31,
2003 2002
------------ ----------
Current assets:
Cash and cash equivalents $ 9,866 $ 10,413
Short-term investments 500 7,677
Accounts receivable, net 5,878 7,699
Inventories 2,715 1,581
Deferred product costs - current portion 3,595 6,149
Other current assets 1,406 2,779
--------- ---------
Total current assets 23,960 36,298
Network, equipment and software, net 5,137 6,425
Deferred product costs - non-current portion 2,052 1,496
License rights, net 34,792 36,100
Other assets, net 1,645 1,084
--------- ---------
Total assets $ 67,586 $ 81,403
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,157 $ 2,875
Telecommunications costs payable 2,373 3,268
Accrued interest payable 903 903
Deferred product revenues - current portion 5,259 8,054
Deferred service revenues - current portion 2,155 6,872
Other current liabilities 6,141 5,989
--------- ---------
Total current liabilities 19,988 27,961
Deferred product revenues - non-current portion 4,900 2,791
Senior notes and other notes payable 14,314 14,254
Other non-current liabilities 1,843 979
--------- ---------
Total liabilities 41,045 45,985
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common Stock 484 484
Preferred Stock - Series E -- --
Additional paid-in capital 218,509 218,509
Accumulated deficit (191,890) (183,013)
Treasury stock (562) (562)
--------- ---------
Total stockholders' equity 26,541 35,418
--------- ---------
Total liabilities and stockholders' equity $ 67,586 $ 81,403
========= =========
See accompanying notes to consolidated financial statements.
3
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share)
Three months ended Six months ended
February 28, February 28,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Product $ 563 $ 2,526 $ 1,177 $ 7,794
Ratable product 2,672 2,523 5,349 4,304
Service 8,810 11,043 19,147 22,518
-------- -------- -------- --------
Total revenues 12,045 16,092 25,673 34,616
-------- -------- -------- --------
Cost of revenues:
Product 431 2,184 1,078 6,132
Ratable product 1,929 2,135 3,893 3,611
Service 4,485 5,353 9,908 11,825
Inventory write-down to net realizable value -- 4,693 -- 4,693
-------- -------- -------- --------
Total cost of revenues 6,845 14,365 14,879 26,261
-------- -------- -------- --------
Gross profit 5,200 1,727 10,794 8,355
-------- -------- -------- --------
Expenses:
General and administrative 2,534 3,071 5,037 6,095
Customer service 1,045 1,331 1,985 2,888
Sales and marketing 3,612 2,226 7,792 3,496
Engineering 438 591 903 1,464
Network services center -- 434 -- 885
Depreciation and amortization 1,451 1,894 2,913 3,967
-------- -------- -------- --------
9,080 9,547 18,630 18,795
-------- -------- -------- --------
Operating loss (3,880) (7,820) (7,836) (10,440)
Interest income 130 68 254 136
Interest expense (529) (525) (1,059) (1,063)
Other expense (125) -- (236) --
-------- -------- -------- --------
Loss before income taxes (4,404) (8,277) (8,877) (11,367)
Income tax provision -- -- -- --
-------- -------- -------- --------
Net loss $ (4,404) $ (8,277) $ (8,877) $(11,367)
======== ======== ======== ========
Basic and diluted loss per share:
Net loss per share $ (0.09) $ (0.17) $ (0.18) $ (0.24)
======== ======== ======== ========
Weighted average number of shares outstanding:
Basic and diluted 48,349 48,047 48,349 48,050
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six months ended
February 28,
-----------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $ (8,877) $(11,367)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,605 2,658
Net book value of equipment retired 114 --
Amortization of license rights 1,308 1,309
Amortization of discount on notes payable 30 30
Provision for bad debts 890 473
Amortization of deferred service revenues (4,717) --
Inventory write-down to net realizable value -- 4,693
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,547 2,693
(Increase) decrease in inventory (1,134) 1,994
Decrease in deferred product costs 1,998 2,558
(Increase) decrease in other assets (454) 612
Increase (decrease) in accounts payable 282 (1,065)
Decrease in deferred product revenues (686) (2,880)
Increase in accrued expenses and other liabilities 77 508
-------- --------
Net cash (used in) provided by operating actitivies (8,017) 2,216
-------- --------
Cash flows from investing activities:
Additions to network, equipment and software (307) (1,071)
Purchases of short-term investments (5,496) (6,855)
Redemptions of short-term investments 12,673 3,400
-------- --------
Net cash provided by (used in) investing activities 6,870 (4,526)
-------- --------
Cash flows from financing activities:
Common stock repurchased -- (15)
Proceeds from exercise of stock options -- 14
Proceeds from sale of service contract 650 --
Payments on capital leases (50) --
-------- --------
Net cash provided by (used in) financing activities 600 (1)
-------- --------
Decrease in cash and cash equivalents (547) (2,311)
-------- --------
Cash and cash equivalents, beginning of period 10,413 9,814
-------- --------
Cash and cash equivalents, end of period $ 9,866 $ 7,503
======== ========
Supplemental cash flow information:
Interest paid $ 994 $ 985
======== ========
Taxes paid $ -- $ 778
======== ========
Non-cash investing activities:
Purchases of assets through capital leases $ 124 $ --
======== ========
See accompanying notes to consolidated financial statements.
5
MINORPLANET SYSTEMS USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share information)
Preferred Stock Common Stock Additional Treasury Stock
------------------ ------------------ Paid-in --------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
------- -------- ---------- ------ ---------- ------ ------ ----------- ----------
Stockholders' equity at
August 31, 2002 1 $ -- 48,424,960 $484 $ 218,509 75,799 $(562) $ (183,013) $ 35,418
Net loss (8,877) (8,877)
--- ------- ---------- ---- ---------- ------ ----- ---------- ----------
Stockholders' equity at
February 28, 2003 1 $ -- 48,424,960 $484 $ 218,509 75,799 $(562) $ (191,890) $ 26,541
=== ======= ========== ==== ========== ====== ===== ========== ==========
See accompanying notes to consolidated financial statements.
6
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
1. BUSINESS OVERVIEW
Minorplanet Systems USA, Inc., a Delaware corporation (the "Company"),
develops and implements mobile communications solutions for service vehicle
fleets, long-haul truck fleets, and other mobile-asset fleets, including
integrated voice, data and position location services. As a result of the
completion of the transactions contemplated by the Stock Purchase and Exchange
Agreement by and among the Company, Minorplanet Systems PLC, a United Kingdom
public limited company ("Minorplanet UK"), and Mackay Shields LLC, dated
February 14, 2001, the Company commenced marketing the Vehicle Management
Information(TM) ("VMI") product licensed from Minorplanet Limited, the
operating subsidiary of Minorplanet UK, into the automatic vehicle location
("AVL") market in the United States during the last half of 2001. VMI is
designed to maximize the productivity of a mobile workforce as well as reduce
vehicle mileage and fuel-related expenses. The VMI technology consists of: (i) a
data control unit ("DCU") that continually monitors and records a vehicle's
position, speed and distance traveled; (ii) a command and control center ("CCC")
which receives and stores in a database information downloaded from the DCU's;
and (iii) software used for communication, messaging and detailed reporting. VMI
uses satellite-based Global Positioning System ("GPS") location technology to
acquire a vehicle location on a minute-by-minute basis and a global system for
mobile communications ("GSM") based cellular network to transmit data between
the DCU's and the CCC. GSM is a digital technology developed in Europe and has
been adapted for North America. GSM is the most widely used wireless digital
standard in the world. The VMI application is targeted to small and medium sized
fleets in the metro marketplace which the Company believes represents a total
U.S. market of approximately 21 million vehicles.
VMI provides minute-by-minute visibility into the activities of a
mobile workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the user can view when an employee starts or finishes work,
job site arrival times and site visit locations. In addition, exception reports
allow the user to set various parameters within which vehicles must operate, and
the system will report exceptions including speeding, extended stops,
unscheduled stops, route deviations, visits to barred locations and excessive
idling.
The initial application for the Company's wireless enhanced services,
HighwayMaster Series 5000 ("Series 5000"), was developed for and sold to
companies that operate in the long-haul trucking market. The Company provides
long-haul trucking companies with a comprehensive package of mobile
communications and management information services, thereby enabling its
trucking customers to effectively monitor the operations and improve the
performance of their fleets. The initial product application was customized and
has been sold to and installed in the service vehicle fleets of the member
companies of SBC Communications, Inc. ("SBC Companies"), pursuant to the service
vehicle contract (the "Service Vehicle Contract" or "Contract"). During the
fourth calendar quarter of 1999, the Company entered the mobile asset tracking
market with the introduction of its trailer-tracking product, TrackWare(R).
During the first calendar quarter of 2001, the Company began marketing and
selling 20/20V(TM), a low-cost tracking product designed for small and medium
sized fleets in the transportation marketplace.
On March 15, 2002, the Company completed the sale to Aether Systems,
Inc. ("Aether") of certain assets and licenses related to the Company's
long-haul trucking and asset-tracking businesses pursuant to the Asset Purchase
Agreement effective as of March 15, 2002, by and between the Company and Aether
(the "Sale"). Under the terms of the Sale, the Company sold to Aether assets and
related license rights to its Platinum Service software solution, 20/20V(TM),
and TrackWare(R) asset and trailer-tracking products. In addition, the Company
and Aether agreed to form a strategic relationship with respect to the Company's
long-haul customer products, pursuant to which the Company assigned to Aether
all service revenues generated post-closing from its Series 5000 customer base.
Aether, in turn, agreed to reimburse the Company for the network and airtime
service costs related to providing the Series 5000 service. The two companies
also agreed to work jointly in the adaptation of the VMI product technology for
the potential distribution of VMI by Aether to the long-haul-trucking market.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein include
those of Minorplanet Systems USA Inc. and its wholly-owned subsidiaries:
HighwayMaster of Canada, LLC, Caren (292) Limited and Minorplanet Systems USA
Limited. All significant intercompany accounts and transactions have been
eliminated in consolidation. The unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all footnote disclosures
required by accounting principles generally accepted in the United States of
America. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements for the eight-month transition
period ended August 31, 2002. The accompanying consolidated financial statements
reflect all adjustments (all of which are of a normal recurring nature), which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods in accordance with accounting principles generally accepted in
the United States of America. The results for any interim period are not
necessarily indicative of the results for the entire fiscal year.
3. CHANGE IN FISCAL YEAR END
On May 21, 2002, the Company's Board of Directors approved changing the
Company's fiscal year end to August 31st. Accordingly, the Company is presenting
unaudited financial statements for the three and six-month periods ended
February 28, 2003, as well as comparable unaudited financial statements for the
three and six-month periods ended February 28, 2002, in this Form 10-Q.
4. NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for companies that voluntarily adopt the fair
value based method of accounting for stock-based employee compensation in
accordance with Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123"). SFAS 148 also amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for annual financial statements for fiscal
years ending after December 15, 2002 and for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. The Company plans to adopt the disclosure-only provisions of SFAS 148
beginning with the interim period ending May 31, 2003 and will continue to
account for stock-based employee compensation expense under APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
In November of 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
This interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002; while the provisions of
the disclosure requirements are effective for financial statements of interim or
annual reports ending after December 15, 2002. The Company adopted the liability
and disclosure provisions of FIN 45 during the second quarter of fiscal year
2003 and such adoption did not have a material impact on its consolidated
financial statements. The Company has begun disclosing product warranty
commitments as required by FIN 45 in the notes of its interim financial
statements (Note 9).
5. REVENUE RECOGNITION
The Company recognizes revenue from its long haul trucking Series 5000
mobile units, Trackware, and 20/20V products under the provisions of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Under SAB 101, initial sale proceeds received under multiple-element
sales arrangements which require the Company to deliver products or services
over a period of time and which are not determined by the Company to meet
certain criteria are deferred. These criteria include requirements for a
separate earnings process, fair value determinations, and that the delivery of
future products or services under the arrangement are not required for the
delivered items to serve their intended purpose. Sales proceeds related to
delivered products that are deferred are
8
recognized over the greater of the contract life or the estimated life of the
customer relationship. The Company has estimated such periods to range from
three to ten years. The Company's estimate of the life of a customer
relationship is determined based upon the Company's historical experience with
its customers together with the Company's estimate of the remaining life of the
applicable product offering. Sales proceeds recognized under this method are
portrayed in the accompanying Consolidated Statement of Operations as "Ratable
Product Revenues." The related deferred revenue is classified as a current and
long term liability on the balance sheet under the captions "Deferred product
revenues - current portion" and "Deferred product revenues- non-current
portion." If the customer relationship is terminated prior to the end of the
estimated customer relationship period, such deferred sales proceeds are
recognized as revenue in the period of termination. The Company will
periodically review its estimates of the customer relationship period as
compared to historical results and adjust its estimates prospectively. Under
sales arrangements which meet the three criteria described above, revenues are
recognized upon shipment of the products or upon customer acceptance of the
delivered products, if terms of the sales arrangement give the customer right of
acceptance. Sales arrangements recognized upon delivery and acceptance relate
primarily to products delivered under the Service Vehicle Contract.
The VMI product includes both hardware and software components. Due to the
interdependency of the functionality of these components, revenue recognition is
governed by SAB 101 and Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). Under SAB 101, initial sale proceeds received under
multiple-element sales arrangements which require the Company to deliver
products or services over a period of time and which are not determined by the
Company to meet certain criteria are deferred. Currently, the Company resells
wireless airtime to customers of its VMI products over the contract term.
Therefore, in accordance with SAB 101, the Company defers VMI product revenues
and recognizes this revenue ratably over the longer of the term of the customer
contract or the estimated life of the customer relationship. Such terms range
from one to five years. In addition, the Company has also deferred revenue
consistent with the provisions of SOP 97-2. All VMI product sales proceeds are
recognized under this method and are portrayed in the accompanying Consolidated
Statement of Operations as "Ratable product revenues." The related deferred
revenue is classified as a current and long term liability on the balance sheet
under the captions "Deferred product revenues - current portion" and "Deferred
product revenues non-current portion."
Service revenue generally commences upon product installation and is
recognized ratably over the period such services are provided.
As a result of the Sale to Aether, the Company recorded deferred service
revenues totaling $12.2 million in March of 2002, which reflected the estimated
fair value of services to be provided to Aether net of cash reimbursements from
Aether under the terms of the agreement. The deferred service revenue is being
recognized, based on the number of active network service subscriber units, over
the term of the agreement with Aether that expires in September of 2003.
6. LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses since inception and
has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Net cash used for operating
activities during the six months ended February 28, 2003 was $8.0 million.
Operating cash expenditures were primarily attributable to the ongoing VMI sales
operations. The Company currently markets and sells the VMI product in Dallas,
Texas; Houston, Texas; Atlanta, Georgia; Los Angeles, California; and Austin,
Texas.
The Company believes the acquisition of the VMI license rights will provide
the Company significant marketing potential of the licensed VMI technology,
enhancing future results of operations and reducing the need for capital
resources to develop similar technology. Also, as a result of the Sale to Aether
of certain assets and licenses related to the Company's long-haul trucking and
asset-tracking businesses, Aether is contractually obligated to continue to
reimburse the Company for the network and airtime service costs related to
providing the Series 5000 service.
As of February 28, 2003, the Company had approximately 34,500 units in
service with the SBC Companies, under the Service Vehicle Contract, which
accounted for approximately 57% of the Company's installed base. The Company
recently signed a one-year extension of this contract to provide mobile location
and communication services to SBC service vehicles through January 30, 2004.
Critical success factors in Management's plans to achieve positive cash flow
from operations include:
o Significant market acceptance of the VMI product line in the U.S.
Management believes the market for products such as VMI represents a
total potential of approximately 21 million vehicles. Currently,
management believes this market is approximately five percent
penetrated with asset tracking and vehicle
9
information management solutions.
o Maintain and expand the Company's direct sales channel. New
salespersons will require training and time to become productive. In
addition, there is significant competition for qualified salespersons,
and the Company must continue to offer attractive compensation plans
and opportunities to attract qualified salespersons.
o Securing and maintaining adequate third party leasing sources for
customers who purchase VMI.
Based on projected operating results, the Company believes its existing
capital resources will be sufficient to fund its currently anticipated operating
needs and capital expenditure requirements for the next twelve months. The
projected operating results assume that VMI product sales will increase to
approximately double the current sales levels over the next six months.
Management believes the sales increases are achievable as the projected sales
volumes are based on results achieved in the United Kingdom and Europe. If cash
generated from operations is not sufficient to meet its working capital
requirements, the Company may seek to sell additional equity or debt securities.
The sale of additional equity or convertible debt securities could result in
additional dilution to existing stockholders. If additional funds are raised
through debt securities, holders of these securities could obtain certain rights
and preferences senior to holders of the Company's common stock, as well as
restrict the Company's operations. If additional working capital is required,
there can be no assurance that additional financing will be available, which in
this case, the Company may be required to reduce the scope of its operations
which could negatively impact its financial condition and operating results.
7. INVENTORY WRITE-DOWN TO NET REALIZABLE VALUE
In December of 2001, the Company recorded an inventory write-down of $4.7
million for excess inventory associated with certain circuit boards used in the
manufacture of the Trackware and 20/20V product lines. The Trackware product
line was designed to more efficiently utilize trailer assets. Due to the
economic downturn, trucking companies had an excess of trailers in their fleets;
thus, utilization of these assets was not an issue for many trucking companies,
and management believed that significant demand for the Trackware product would
not increase in the near term. In addition, the Company announced the launch of
20/20V in March of 2001; however, by December of 2001, the Company had no
significant sales of this product.
8. OTHER ASSETS
The Company provides lease financing to certain customers of its VMI
products. Leases under these arrangements are classified as sales-type leases or
operating leases. These leases typically have terms of one to five years, and
all sales type leases are discounted at interest rates ranging from 14% to 18%
depending on the customer's credit risk. The net present value of the lease
payments for sales-type leases is recognized as sales revenue and deferred under
the Company's revenue recognition policy. The net investment in sales-type
leases, contained within other assets on the Company's balance sheet, is
composed of total minimum lease payments net of unearned interest income and
allowance for uncollectible accounts.
9. COMMITMENTS AND CONTINGENCIES
Product Warranty Guarantees
The Company provides a limited warranty on all VMI product sales, at no
additional cost to the customer, that provides for replacement of defective
parts during the contract term, which typically ranges from three to five years.
The Company also provides limited two-year warranties to replace defective parts
on units sold to the SBC Companies under the Service Vehicle Contract. The
company establishes an estimated liability for expected future warranty
commitments based on a review of historical warranty expenditures associated
with these products and other similar products. Changes in the Company's product
warranty liability are summarized below (in thousands).
10
For the Six For the Six
Months Ended Months Ended
February 28, 2003 February 28, 2002
----------------- -----------------
Warranty product liability at beginning of period $ 490 $ 548
Accruals for product warranties issued 196 671
Product replacements (107) (793)
Adjustments to pre-existing warranty estimates (94) 625
------- -------
Warranty product liability at end of period $ 485 $ 1,051
======= =======
Compromise Settlement Agreement
During the first calendar quarter of 2001, the outsource manufacturer (the
"vendor") that supplied substantially all of the Company's finished goods
inventory asserted a claim for reimbursement for excess and obsolete inventory
purchased in its capacity as the manufacturer of the Company's products. This
claim was disputed by the Company. As a result of this dispute, beginning in
April 2001, the vendor ceased to perform on its contract to provide finished
goods inventory and certain other services to the Company. The claims and
counterclaims ultimately led to each of the parties filing litigation against
the other. The vendor and the Company executed a Compromise Settlement Agreement
on October 9, 2001. The Company recorded a provision of $2.1 million during 2001
as its estimate of the cost to be incurred to settle this litigation, of which
$0.5 million had been paid as of February 28, 2003.
On April 4, 2003, the Company and the vendor entered into an amendment to
the Compromise Settlement Agreement pursuant to which the Company agreed to
issue purchase orders to the vendor for the manufacture of 6,000 VMI data
control units in lieu of and in full and final settlement of the Company's
obligation to make the final $1.6 million payment to the vendor under the
Compromise Settlement Agreement. Specifically, the Company will issue to the
vendor twelve separate purchase orders for the manufacture of a total of 6,000
VMI data control units to be delivered over a twelve-month period. In addition
to the agreed upon unit price of the data control units, the Company agreed to
pay a $275 surcharge per unit which will compensate the vendor for the remaining
$1.6 million payable under the Compromise Settlement Agreement. The Company will
take delivery of the initial lot of 500 units within 30 days of the Company's
approval of the vendor's first production article with an additional 500 units
being delivered to the Company on the first day of each month thereafter until
all 6,000 units have been delivered. Payment for each 500 unit lot is due upon
receipt of each shipment.
10. RELATED PARTY TRANSACTIONS
Minorplanet UK owns 62 percent of the Company's outstanding common stock
and thus controls the Company. Transactions with Minorplanet UK and its
operating subsidiaries are summarized below (in thousands).
For the three months For the six months
ended February 28, ended February 28,
-------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Research and development costs $ 250 $ 250 $ 500 $ 500
Contract service expenses $1,177 $ -- $2,459 $ --
------ ------ ------ ------
$1,427 $ 250 $2,959 $ 500
====== ====== ====== ======
As of February 28, As of August 31,
2003 2002
------------------ ----------------
Other current assets $ -- $ 794
Other current liabilities $ 882 $ 248
Other non-current liabilities $1,760 $ 880
11
The Company currently pays Minorplanet Limited an annual fee of $1.0
million to aid in funding research and development of future products covered by
the license rights. The fee is to be evaluated and may be increased based on
actual research and development costs incurred by Minorplanet UK. The research
and development costs in the above table represent the annual $1.0 million fee
pro-rated for the three and six months ended February 28, 2003 and 2002
respectively.
On September 26, 2002, the Company entered into a letter addendum to the
exclusive license and distribution agreement with Minorplanet Limited to provide
executive and non-executive sales and marketing consulting services for the
six-month period from August 23, 2002 to February 22, 2002. Under terms of the
agreement, the Company is not required to pay the executive consulting fees
totaling $1,760,000 unless and until the Company has filed a Form 10-K reporting
net income and positive cash flow for the previous 12-month period. As of
February 28, 2003 and August 31, 2002, contingent liabilities for $1,760,000 and
$880,000 respectively, payable to Minorplanet Limited were included on the
Company's consolidated balance sheet under other non-current liabilities. The
associated deferred asset in the amount of $794,000, which was net of $86,000
amortization, was reflected in other current assets on the Company's
consolidated balance sheet as of August 31, 2002. This deferred asset was
subsequently amortized to expense during the three months ended November 30,
2002 and is included in contract services expenses in the above table.
Other current liabilities in the above table primarily include the unpaid
portion of the non-executive sales and marketing contract services and research
and development costs as of February 28, 2003 and August 31, 2002.
11. SEGMENT REPORTING
The Company's reportable segments offer different products and/or services.
Each segment also requires different technology and marketing strategies. The
company's two reportable segments are VMI and Network Service Center Systems
("NSC Systems").
During the last half of the 2001 calendar year, the Company commenced
marketing the VMI product licensed from Minorplanet Limited into the AVL
marketplace in the United States. VMI is designed to maximize the productivity
of a mobile workforce as well as reduce vehicle mileage and fuel related
expenses. The VMI technology consists of: (i) a data control unit that
continually monitors and records a vehicle's position, speed and distance
traveled; (ii) a command and control center which receives and stores in a
database information downloaded from the DCU's; and (iii) software used for
communication, messaging and detailed reporting. VMI uses the satellite-based
global positioning system to acquire a vehicle location on a minute-by-minute
basis and a global system for mobile communications based cellular network to
transmit data between the DCU's and the CCC. The VMI application is targeted to
small and medium-sized fleets in the metro marketplace, which the Company
believes represents a total U.S. market of approximately 21 million vehicles.
Through its NSC Systems segment, the Company provides long-haul trucking
companies with a comprehensive package of mobile communications and management
information services, thereby enabling its trucking customers to effectively
monitor the operations and improve the performance of their fleets. The initial
product application was customized and has been sold to and installed in the
service vehicle fleets of the member companies of SBC Communications, Inc.,
pursuant to the Service Vehicle Contract. Prior to the Sale to Aether, the
Company also provided mobile asset tracking solutions with its trailer-tracking
products, TrackWare(R) and 20/20V(TM). Pursuant to the terms of the Sale, these
products continue to use the Company's Network Service Center to relay voice and
messages between the mobile units and the customer's dispatchers.
On March 15, 2002, the Company completed the Sale to Aether of certain NSC
Systems assets and licenses related to the Company's long-haul trucking and
asset-tracking businesses pursuant to an Asset Purchase Agreement effective as
of March 15, 2002, by and between the Company and Aether.
Operating expenses are allocated to each segment based on management's
estimate of the utilization of financial resources by each segment. The
following tables set forth segment financial information (in thousands).
12
Three Months Ended February 28, 2003 Three Months Ended February 28, 2002
------------------------------------ --------------------------------------
NSC Systems VMI Consolidated NSC Systems VMI Consolidated
----------- --------- ------------ ----------- --------- ------------
Revenues $ 10,822 $ 1,223 $ 12,045 $ 16,014 $ 78 $ 16,092
Operating income (loss) 3,276 (7,156) (3,880) (3,646) (4,174) (7,820)
Interest expense 529 -- 529 525 -- 525
Interest income 32 98 130 67 1 68
Depreciation and amortization 743 708 1,451 1,229 665 1,894
Net income (loss) 2,779 (7,183) (4,404) (4,104) (4,173) (8,277)
Total assets 22,436 45,150 67,586 43,208 39,471 82,679
Capital expenditures 42 55 97 574 $ 371 945
Other significant non-cash items:
Purchases of assets through capital leases 30 -- 30 -- -- --
Six Months Ended February 28, 2003 Six Months Ended February 28, 2002
------------------------------------- -------------------------------------
NSC Systems VMI Consolidated NSC Systems VMI Consolidated
----------- --------- ------------ ----------- --------- ------------
Revenues $ 23,583 $ 2,090 $ 25,673 34,468 148 $ 34,616
Operating income (loss) 7,098 (14,934) (7,836) (3,609) (6,831) (10,440)
Interest expense 1,059 -- 1,059 1,063 -- 1,063
Interest income 85 169 254 135 1 136
Depreciation and amortization 1,496 1,417 2,913 2,651 1,316 3,967
Net income (loss) 6,014 (14,891) (8,877) (4,537) (6,830) (11,367)
Total assets 22,436 45,150 67,586 43,208 39,471 82,679
Capital expenditures 170 137 307 674 397 1,071
Other significant non-cash items:
Purchase of assets through capital leases 124 -- 124 -- -- --
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As a result of the completion of the transactions contemplated by the Stock
Purchase and Exchange Agreement by and among the Company, Minorplanet Systems
PLC, a United Kingdom public limited company ("Minorplanet UK"), and Mackay
Shields LLC, dated February 14, 2001, the Company commenced marketing the
Vehicle Management Information(TM) ("VMI") product licensed from Minorplanet
Limited, the operating subsidiary of Minorplanet UK, into the automatic vehicle
location ("AVL") market in the United States during the last half of 2001. VMI
is designed to maximize the productivity of a mobile workforce as well as reduce
vehicle mileage and fuel related expenses. The VMI technology consists of: (i) a
data control unit ("DCU") that continually monitors and records a vehicle's
position, speed and distance traveled; (ii) a command and control center ("CCC")
which receives and stores in a database information downloaded from the DCU's;
and (iii) software used for communication, messaging and detailed reporting. VMI
uses satellite-based Global Positioning System ("GPS") location technology to
acquire a vehicle location on a minute-by-minute basis and a global system for
mobile communications ("GSM") based cellular network to transmit data between
the DCU's and the CCC. GSM is a digital technology developed in Europe and has
been adapted for North America. GSM is the most widely used wireless digital
standard in the world. The VMI application is targeted to small and medium sized
fleets in the metro marketplace which the Company believes represents a total
U.S. market of approximately 21 million vehicles.
VMI provides minute-by-minute visibility into the activities of a mobile
workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the user can view when an employee starts or finishes work,
job site arrival times and site visit locations. In addition, exception reports
allow the user to set various parameters within which vehicles must operate, and
the system will report exceptions including speeding, extended stops,
unscheduled stops, route deviations, visits to barred locations and excessive
idling.
Through its NSC Systems segment, the Company provides long-haul trucking
companies with a comprehensive package of mobile communications and management
information services, thereby enabling its trucking customers to effectively
monitor the operations and improve the performance of their fleets. The initial
product application was customized and has been sold to and installed in the
service vehicle fleets of the member companies of SBC Communications, Inc. ("SBC
Companies"), pursuant to the service vehicle contract (the "Service Vehicle
Contract" or "Contract"). Prior to the sale to Aether Systems Inc. of certain
assets and licenses, the Company also provided mobile asset tracking solutions
with its trailer-tracking products, TrackWare(R) and 20/20V(TM).
On March 15, 2002, the Company completed the sale to Aether Systems, Inc.
("Aether") of certain assets and licenses related to the Company's long-haul
trucking and asset-tracking businesses pursuant to an Asset Purchase Agreement
effective as of March 15, 2002, by and between the Company and Aether (the
"Sale"). Under the terms of the Sale, the Company sold to Aether assets and
related license rights to its Platinum Service software solution, 20/20V(TM),
and TrackWare(R) asset and trailer-tracking products. In addition, the Company
and Aether agreed to form a strategic relationship with respect to the Company's
long-haul customer products, pursuant to which the Company assigned to Aether
all service revenues generated post-closing from its HighwayMaster Series 5000
("Series 5000") customer base. Aether, in turn, agreed to reimburse the Company
for the network and airtime service costs related to providing the Series 5000
service. Hereinafter, Series 5000 units for which the Company provides network
services are referred to as network services subscribers. The two companies also
agreed to work jointly in the adaptation of the VMI product technology for the
potential distribution of VMI by Aether to the long-haul-trucking market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 2003, COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 2002
Total revenues for the three months ended February 28, 2003 decreased to
$12.0 million from $16.1 million during the three months ended February 28, 2002
primarily due to a reduction in NSC Systems product and service revenues. NSC
product revenues, including ratable product revenue, decreased from $5.0 million
during the three months ended February 28, 2002 to $2.3 million during the three
months ended February 28, 2003 while NSC service revenues decreased from $11.0
million to $8.5 million during the same periods respectively. The decrease in
NSC Systems product revenue was primarily due to lower sales under the Service
Vehicle Contract with SBC as well as a
14
reduction in long haul trucking product revenue due to the Sale of certain
assets to Aether in March of 2002. The drop in NSC Systems service revenue was
primarily attributable to a 33% reduction in the number of NSC Systems network
services subscriber units from 30,421 at February 28, 2002 to 20,261 as of
February 28, 2003. This decrease in network subscriber units was anticipated
after the Sale to Aether as many of these units have converted to Aether's
network.
The decrease in NSC Systems revenue was partially offset by an increase in
VMI revenue. VMI revenue increased from $0.1 million during the three months
ended February 28, 2002 to $1.2 million during the three months ended February
28, 2003. The Company began marketing the VMI product in the Dallas, Texas and
Houston, Texas markets during the last half of 2001, the Atlanta, Georgia market
in January of 2002, and the Los Angeles, California and Austin, Texas markets
beginning in July of 2002. Total units sold more than doubled from approximately
700 units during the three months ended February 28, 2002 to 1,450 units during
the three months ended February 28, 2003. However, in accordance with the
Company's revenue recognition policies, revenue and the associated cost of sales
are deferred under Staff Accounting Bulletin No. 101 and Statement of Position
97-2, and recognized over the greater of the contract life or the estimated life
of the customer relationship. Thus, the increase in VMI revenue during the three
months ended February 28, 2003 is primarily due to the ratable recognition of
previously deferred revenue associated with the growing VMI installed base.
Total VMI deferred product revenue reflected on the Company's balance sheet, net
of amortization, has increased from $0.8 million as of February 28, 2002 to $7.0
million at February 28, 2003.
Total gross profit margin of 43% for the three months ended February 28,
2003 increased from 11% during the same period last year. During December of
2001, the Company recorded a $4.7 million write-down of inventory to net
realizable value due to excess inventory associated with certain circuit boards
used in the manufacture of the Trackware and 20/20V product lines within the NSC
Systems segment. Excluding this inventory write-down, gross profit margin would
have been 40% during the three months ended February 28, 2002. The improvement
in gross margin, excluding the inventory write-down, during the three months
ended February 28, 2003 was primarily due to higher ratable product margins on
VMI sales and lower warranty costs associated with units installed under the
Service Vehicle Contract with SBC.
Total operating expenses decreased to $9.1 million during the three months
ended February 28, 2003 from $9.5 million during the same period in 2002. Sales
and marketing costs for the three months ending February 28, 2003 increased to
$3.6 million from $2.2 million during the three months ended February 28, 2002.
This increase is primarily due to higher sales consulting costs and other
ongoing expenditures related to the VMI product launch including the hiring of
new sales personnel and the opening of a new sales and operations office in Los
Angeles. On September 26, 2002, the Company entered into a letter addendum to
the exclusive license and distribution agreement with Minorplanet Limited to
provide executive and non-executive sales and marketing consulting services for
the six-month period from August 23, 2002 to February 22, 2003. During the three
months ended February 28, 2003, total sales and marketing contract service
expenses incurred under this agreement were approximately $1.2 million. However,
under terms of the agreement, the Company is not required to pay the $0.9
million executive consulting fees incurred during the three months ended
February 28, 2003 until the Company has filed a Form 10-K reporting net income
and positive cash flow for the previous twelve-month period.
The increase in sales and marketing costs during the three months ended
February 28, 2003 was offset by reductions in operating expenses across all
other departments including customer service, engineering, network services, and
general and administrative. Contributing to the decrease in other departmental
operating expenses were reductions in personnel primarily associated with the
Sale to Aether. Also, after the March 15, 2002 Sale to Aether, all costs of
operating the NSC were included in cost of revenues in order to properly match
these expenses with the associated revenues generated from providing the network
and airtime services to Aether. Total NSC operating costs reclassified to cost
of sales during the three months ended February 28, 2003 were $0.6 million.
Depreciation and amortization expense also decreased by $0.4 million during the
three months ended February 28, 2003 in comparison to the same period during
2002 primarily due to several Network Service Center assets becoming fully
depreciated.
Operating losses improved to $3.9 million during the three months ended
February 28, 2003 from $7.8 million during the three months ended February 28,
2002. Excluding the $4.7 million inventory write-down during December of 2001,
operating losses would have been $3.1 million during the three months ended
February 28, 2002. Thus, the effective increase in operating losses during the
three months ended February 28, 2003 is primarily due to lower NSC Systems sales
under the Service Vehicle Contract and increased sales and marketing costs
associated with the VMI product launch. The Company's NSC Systems segment
reported operating income of $3.3 million for the three months ended February
28, 2003, which was offset by the $7.2 million VMI segment operating loss
associated with the continued expansion of the VMI sales and marketing efforts.
15
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 2003, COMPARED TO SIX MONTHS ENDED
FEBRUARY 28, 2002
Total revenues decreased from $34.6 million during the six months ended
February 28, 2002 to $25.7 million during the six months ended February 28, 2003
primarily due to lower product and service revenues within the NSC Systems
segment. NSC Systems product revenues, including ratable product revenue,
decreased from $12.0 million during the six months ended February 28, 2002 to
$5.0 million during the six months ended February 28, 2003. The decrease in NSC
Systems product revenue was primarily due to lower sales under the Service
Vehicle Contract with SBC as well as a reduction in long haul trucking product
revenue due to the Sale of certain assets to Aether in March of 2002. NSC
Systems service revenue decreased from $22.5 million during the six months ended
February 28, 2002 to $18.6 million during the six months ended February 28, 2003
primarily due to an anticipated reduction in network services subscriber units
after the Sale to Aether in March of 2002. Many of these units have converted to
Aether's network.
VMI revenue increased from $0.1 million during the six months ended
February 28, 2002 to $2.1 million during the six months ended February 28, 2003.
VMI units sold increased from approximately 800 units during the six months
ended February 28, 2002 to 3,200 units during the six months ended February 28,
2003. As discussed above, the Company's revenue recognition policies require
deferral of VMI revenues and the associated cost of sales and recognition over
the greater of the contract life or the estimated life of the customer
relationship. Therefore, the increase in VMI revenue during the six months ended
February 28, 2003 is primarily due to the ratable recognition of previously
deferred revenue associated with the growing VMI installed base.
Total gross profit margin increased to $10.8 million during the six months
ended February 28, 2003 from $8.4 million during the six months ended February
28, 2002 and gross profit percentage improved from 24% to 42% for the same
periods respectively. During December of 2001, the Company recorded a $4.7
million write-down of inventory to net realizable value due to excess inventory
associated with certain circuit boards used in the manufacture of the Trackware
and 20/20V product lines within the NSC Systems segment. Excluding this
inventory write-down, gross profit margin would have been 38% during the six
months ended February 28, 2002. The improvement in gross margin, excluding the
inventory write-down, during the six months ended February 28, 2003 was
primarily due to higher ratable product margins associated with VMI product
sales, lower warranty costs on units installed under the Service Vehicle
Contract with SBC, and improved margins on maintenance services under the
Service Vehicle Contract with SBC. The Company provided much of the SBC
maintenance service work using internal resources during the six months ended
February 28, 2003 rather than outsourcing all of the service to third party
vendors as was done during the same period last year, which resulted in a cost
savings of approximately $1.2 million.
Total operating expenses for the six months ended February 28, 2003 were
$18.6 million versus $18.8 million during the six months ended February 28,
2002. Sales and marketing costs increased to $7.8 million during the six months
ended February 28, 2003 from $3.5 million during the same period last year. This
increase is primarily due to higher sales consulting costs and other ongoing
expenditures related to the VMI product launch including the hiring of new sales
personnel and the opening of a new sales and operations in Houston, Atlanta, and
Los Angeles. On September 26, 2002, the Company entered into a letter addendum
to the exclusive license and distribution agreement with Minorplanet Limited to
provide executive and non-executive sales and marketing consulting services for
the six-month period from August 23, 2002 to February 22, 2003. During the six
months ended February 28, 2003, total sales and marketing contract service
expenses incurred under this agreement were approximately $2.5 million. However,
under terms of the agreement, the Company is not required to pay the $1.8
million executive consulting fees incurred during the six months ended February
28, 2003 until the Company has filed a Form 10-K reporting net income and
positive cash flow for the previous twelve-month period.
The increase in sales and marketing costs during the six months ended
February 28, 2003 was offset by reductions in operating expenses across all
other departments. Contributing to these departmental expense decreases were
personnel reductions made as a consequence of the cancellation of various
technology initiatives, as well as personnel reductions associated with the Sale
to Aether. Depreciation and amortization expense decreased by $1.1 million
during the six months ended February 28, 2003 in comparison to the same period
during 2002 primarily due to several Network Service Center assets becoming
fully depreciated. After the Sale to Aether in March of 2002, all costs of
operating the NSC were included in cost of revenues in order to properly match
these expenses with the associated revenues generated from providing the network
and airtime services to Aether. Total NSC operating costs charged to cost of
sales during the six months ended February 28, 2003 were $1.2 million.
16
Operating losses improved to $7.8 million during the six months ended
February 28, 2003 from $10.4 million during the six months ended February 28,
2002. Excluding the $4.7 million inventory write-down during December of 2001,
operating losses would have been $5.7 million during the six months ended
February 28, 2002. Thus, the effective increase in operating losses during the
six months ended February 28, 2003 is primarily due to lower NSC Systems sales
under the Service Vehicle Contract and increased sales and marketing costs
associated with the VMI product launch. Operating income for the NSC Systems
segment was $7.1 million for the six months ended February 28, 2003, which was
offset by the $14.9 million VMI segment operating loss associated with the
continued expansion of the VMI sales and marketing efforts. During the six
months ended February 28, 2002, the Service Vehicle Contract was responsible for
the majority of new product sales. Product shipments under that contract were
minimal during the six months ended February 28, 2003 and are expected to be low
during the remainder of the 2003 fiscal year. Thus, the Company's financial
condition and results of operations are heavily dependent upon the Company's
ability to market and sell the VMI products.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses since inception and
has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Net cash used for operating
activities during the six months ended February 28, 2003 was $8.0 million.
Operating cash expenditures were primarily attributable to the ongoing VMI sales
operations. The Company currently markets and sells the VMI product in Dallas,
Texas; Houston, Texas; Atlanta, Georgia; Los Angeles, California; and Austin,
Texas.
The Company believes the acquisition of the VMI license rights will provide
the Company significant marketing potential of the licensed VMI technology,
enhancing future results of operations and reducing the need for capital
resources to develop similar technology. Also, as a result of the Sale to Aether
of certain assets and licenses related to the Company's long-haul trucking and
asset-tracking businesses, Aether is contractually obligated to continue to
reimburse the Company for the network and airtime service costs related to
providing the Series 5000 service.
As of February 28, 2003, the Company had approximately 34,500 units in
service with the SBC Companies, under the Service Vehicle Contract, which
accounted for approximately 57% of the Company's installed base. The Company
recently signed a one-year extension of this contract to provide mobile location
and communication services to SBC service vehicles through January 30, 2004.
Critical success factors in Management's plans to achieve positive cash flow
from operations include:
o Significant market acceptance of the VMI product line in the U.S.
Management believes the market for products such as VMI represents a
total potential of approximately 21 million vehicles. Currently,
management believes this market is approximately five percent
penetrated with asset tracking and vehicle information management
solutions.
o Maintain and expand the Company's direct sales channel. New
salespersons will require training and time to become productive. In
addition, there is significant competition for qualified salespersons,
and the Company must continue to offer attractive compensation plans
and opportunities to attract qualified salespersons.
o Securing and maintaining adequate third party leasing sources for
customers who purchase VMI.
Based on projected operating results, the Company believes its existing
capital resources will be sufficient to fund its currently anticipated operating
needs and capital expenditure requirements for the next twelve months. The
projected operating results assume that VMI product sales will increase to
approximately double the current sales levels over the next six months.
Management believes the sales increases are achievable as the projected sales
volumes are based on results achieved in the United Kingdom and Europe. If cash
generated from operations is not sufficient to meet its working capital
requirements, the Company may seek to sell additional equity or debt securities.
The sale of additional equity or convertible debt securities could result in
additional dilution to existing stockholders. If additional funds are raised
through debt securities, holders of these securities could obtain certain rights
and preferences senior to holders of the Company's common stock, as well as
restrict the Company's operations. If additional working capital is required,
there can be no assurance that additional financing will be available, which in
this case, the Company may be required to reduce the scope of its operations
which could negatively impact its financial condition and operating results.
17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk associated
with its cash and short-term investments due to the short-term nature of these
investments. The Company's 13 3/4% Senior Notes due September 15, 2005 are at a
fixed rate and, thus, are not exposed to interest rate risk.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based upon
management's current beliefs and projections, as well as assumptions made by and
information currently available to management. When used in this Form 10-Q, the
words "anticipate," "believe," "estimate," "expect" and similar expressions are
intended to identify forward-looking statements. Any statement or conclusion
concerning future events is a forward-looking statement, and should not be
interpreted as a promise or conclusion that the event will occur. The Company's
actual operating results or the actual occurrence of any such event could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed in this
report, and the Company's Transition Report on Form 10-K for the eight-month
period ended August 31, 2002.
ITEM 4: CONTROLS AND PROCEDURES
(A) EVALUATION OF CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, which it has
designed to ensure that material information related to the Company, including
its consolidated subsidiaries, is made known to the Company's disclosure
committee on a regular basis. Within 90 days prior to the filing of this report,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), an evaluation of the effectiveness of the Company's disclosure
controls and procedures was performed. Based on this evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures are
effective to ensure that material information is recorded, processed, summarized
and reported by management of the Company on a timely basis in order to comply
with the Company's public disclosure obligations under the relevant federal
securities laws and the SEC rules promulgated thereunder.
(B) CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors, including any corrective actions with regard to significant
deficiencies and material weaknesses, that could significantly affect these
controls subsequent to the date of the Company's evaluation.
18
MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See the Index to Exhibits.
(b) Reports on Form 8-K - None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINORPLANET SYSTEMS USA, INC.
Date: April 11, 2003
By: /s/ Andrew Tillman
------------------------------
Andrew Tillman
Chief Executive Officer
By: /s/ W. Michael Smith
------------------------------
W. Michael Smith
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
20
CERTIFICATION
I, Andrew Tillman, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Minorplanet
Systems USA, Inc.;
2. Based upon my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14), for the
registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
upon our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date April 11, 2003
By /s/ Andrew Tillman
-------------------------
Andrew Tillman, Chief Executive Officer
21
CERTIFICATION
I, W. Michael Smith, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Minorplanet
Systems USA, Inc.;
2. Based upon my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14), for the
registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
upon our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date April 11, 2003
By /s/ W. Michael Smith
---------------------------------------
W. Michael Smith, Executive Vice President,
Chief Financial Officer & Treasurer
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER TITLE
------- -----
2.1 - Stock Purchase and Exchange Agreement by and between the Company, Minorplanet
Systems PLC and Mackay Shields LLC, dated February 14, 2001. (21)
2.2 - Asset Purchase Agreement by and between the Company and Aether Systems, Inc.
dated March 15, 2002. (22)
3.1 - Restated Certificate of Incorporation of the Company, as amended. (29)
3.2 - Second Amended and Restated By-Laws of the Company.(20)
4.1 - Specimen of certificate representing Common Stock, $.01 par value, of the
Company.(1)
4.2 - Indenture dated September 23, 1997 by and among the Company, HighwayMaster
Corporation and Texas Commerce Bank, National Association (the "Indenture").(8)
4.3 - First Supplemental Indenture, dated June 20, 2001, to the Indenture. (28)
4.4 - Pledge Agreement dated September 23, 1997, by and among the Company, Bear,
Stearns & Co. Inc. and Smith Barney Inc.(8)
4.5 - Registration Rights Agreement dated September 23, 1997, by and among the
Company, HighwayMaster Corporation, Bear, Stearns & Co. Inc. and Smith Barney
Inc.(8)
4.9 - Warrant Registration Rights Agreement dated September 23, 1997, by and among the
Company, Bear, Stearns & Co. Inc. and Smith Barney, Inc. (8)
10.1 - Registration Rights Agreement by and between the Company, Minorplanet Systems
PLC and Mackay Shields LLC, dated as of June 21, 2001. (23)
10.2 - Exclusive License and Distribution Agreement by and between Minorplanet Limited,
(an @Track subsidiary) and Mislex (302) Limited, dated June 21, 2001 (20)
10.3 Amended and Restated 1994 Stock Option Plan of the Company, dated February 4,
1994. (1) (4) (5)
10.4 - Amendment No. 1 to the Amended and Restated 1994 Stock Option Plan . (24)
10.5 - Amendment No. 2 to the Amended and Restated 1994 Stock Option Plan. (25)
10.6 - Amendment No. 3 to the Amended and Restated 1994 Stock Option Plan.(30)
10.7 - Stock Option Agreement, dated June 22, 1998, by and between the Company and John
Stupka. (10)
10.8 - Product Development Agreement, dated December 21, 1995, between HighwayMaster
Corporation and IEX Corporation.(2)(3)
10.9 - Software Transfer Agreement, dated April 25, 1997, between HighwayMaster
Corporation and Burlington Motor Carriers, Inc.(6)(7)
10.10 - Lease Agreement, dated March 20, 1998, between HighwayMaster Corporation and
Cardinal Collins Tech Center, Inc.(9)
10.11 - Stock Option Agreement dated November 24, 1998, by and between the Company and
Michael Smith. (10)
10.12 - Agreement No. 980427 between Southwestern Bell Telephone Company, Pacific Bell,
Nevada Bell, Southern New England Telephone and HighwayMaster Corporation
executed on January 13, 1999. (11)(12)
10.13 - Administrative Carrier Agreement entered into between HighwayMaster Corporation
and Southwestern Bell Mobile Systems, Inc. on March 30, 1999. (11)(12)
10.14 - Addendum to Agreement entered into between HighwayMaster Corporation and
International Telecommunications Data Systems, Inc. on February 4, 1999. (11)(12)
10.15 - Second Addendum to Agreement entered into between HighwayMaster Corporation and
International Telecommunications Data Systems, Inc. on February 4, 1999. (11)(12)
10.16 - Stock Option Agreement dated June 24, 1999, by and between the Company and J.
Raymond Bilbao. (13)
10.17 - Fleet-on-Track Services Agreement entered into between GTE Telecommunications
Services Incorporated and HighwayMaster Corporation on May 3, 1999. (13)(14)
23
10.18 - Stock Option Agreement dated September 3, 1999, by and between the Company and
J. Raymond Bilbao. (15)
10.19 - Stock Option Agreement dated September 3, 1999, by and between the Company and
W. Michael Smith. (15)
10.20 - Limited Liability Company Agreement of HighwayMaster of Canada, LLC executed
March 3, 2000. (16)
10.21 - Monitoring Services Agreement dated May 25, 2000, by and between the Company and
Criticom International Corporation. (17) (18)
10.22 - Commercial Lease Agreement dated April 26, 2000 by and between the Company and
10th Street Business Park, Ltd. (18)
10.23 - Stock Option Agreement dated July 18, 2001, by and between the Company and J.
Raymond Bilbao (19)
10.24 - Stock Option Agreement dated June 21, 2001, by and between the Company and J.
Raymond Bilbao (19)
10.25 - Stock Option Agreement dated July 18, 2001, by and between the Company and W.
Michael Smith (19)
10.26 - Stock Option Agreement dated June 21, 2001, by and between the Company and W.
Michael Smith (19)
10.27 - Employment Agreement, dated June 21, 2001, between J. Raymond Bilbao and the
Company (20)
10.28 - Employment Agreement, dated June 21, 2001, between W. Michael Smith and the
Company (20)
10.29 - Agreement No. 980427-03, dated January 31, 2002 between SBC Ameritech, SBC
Pacific Bell, SBC Southern New England Telephone, SBC Southwestern Bell
Telephone, L.P. and the Company (27) (28)
10.30 Agreement and General Release Between the Company and Todd A. Felker dated
October 8, 2002 (31)
10.31 Agreement and Mutual Release Between the Company and Jana A. Bell dated
September 24, 2002 (31)
10.32 Addendum dated September 26, 2002 to Exclusive Licence and Distribution
Agreement (32)
16.1 - Letter from Arthur Andersen to the SEC (Omitted pursuant to Item 304T of
Regulation S-K)
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Andrew Tillman, Chief
Executive Officer (33)
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by W. Michael Smith, Executive
Vice President and Chief Financial Officer (33)
- -------------
(1) Filed in connection with the Company's Registration Statement on Form S-1,
as amended (No. 33-91486), effective June 22, 1995.
(2) Filed in connection with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(3) Certain confidential portions deleted pursuant to Application for
Confidential Treatment filed in connection with the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(4) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).
(5) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1996.
(6) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 1997.
(7) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with the
Company's Form 10-Q Quarterly Report for the quarterly period ended March
31, 1997.
24
(8) Filed in connection with the Company's Registration Statement on Form S-4,
as amended (No. 333-38361).
(9) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended September 30, 1998.
(10) Filed in connection with the Company's Form 10-K fiscal year ended December
31, 1998.
(11) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 1999.
(12) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued June 22, 1999 in connection
with the Company's Form 10 -Q Quarterly Report for the quarterly period
ended March 31, 1999.
(13) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1999.
(14) Certain confidential portions deleted pursuant to letter granting
application for confidential treatment issued October 10, 1999 in
connection with the Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1999.
(15) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended September 30, 1999.
(16) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 2000.
(17) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued December 5, 2000 in
connection with the Company's Form 10 -Q Quarterly Report for the quarterly
period ended June 30, 2000.
(18) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 2000.
(19) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended September 30, 2001.
(20) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on June 29, 2001.
(21) Filed as Appendix A to the Company's Definitive Proxy Statement on Schedule
14A filed with the SEC on May 11, 2001.
(22) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on March 27, 2002. Certain confidential portions deleted
pursuant to Order Granting Application for Confidential Treatment issued in
connection with the Company's Current Report on Form 8-K filed with the SEC
on March 27, 2002.
(23) Filed in connection with the Company's Form S-3 Registration Statement
filed with the SEC on October 10, 2001 (File No. 333-71340).
(24) Incorporated by reference to Exhibit A to the proxy statement contained in
the Company's Definitive Schedule 14A with the SEC on April 25, 2000.
(25) Incorporated by reference to Exhibit F to the proxy statement contained in
the Company's Definitive Schedule 14A filed with the SEC on May 11, 2001.
(26) Filed in connection with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
(27) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended March 31, 2002.
(28) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002.
(29) Incorporated by reference to Exhibit A to the information statement
contained in the Company's Definitive Schedule 14C filed with the SEC on
June 27, 2002.
(30) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 2002.
(31) Filed in connection with the Company's Form 10-K Transition Report for the
eight-month period ended August 31, 2002.
(32) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended November 30, 2002.
(33) Filed herewith.
25